Month: January 2018

The S&P 500 finished last week up 1.57%, the Dow and the Russell 200 both  rose 2% and International markets (EAFA) finished the week up by 1.59%. This has been a very strong start to the a new year, the strength from 2017 has clearly flowed into ’18 and with that, here are the charts I find worthwhile to start the week…

Distance From Major Moving Averages
First let’s take a look at just how strong and fast this move in stocks has been. We are currently in thin air in respect to the distance for the S&P 500 from its 50-day (4.8% above), 200-day (10.88% above), and 1-year Moving Averages (12.53% above). In the last 10 years we’ve only seen the index this far above all three at the same time three times: April 2010, February 2011, and May 2013. We saw a pullback in each of those occurrences but to a varying degree as 2013 was much less of a drawdown compared to ’10 and ’11. Last year we saw the market set quite a few records and that theme doesn’t appear to be over as we make our way into 2018.

Equity Trend Strength
Another way we can measure the magnitude and strength of the current trend is by using the Average Directional Index (ADX) indicator, which measures the strength of a trend, no matter its direction. Below is a weekly chart of the S&P 500 going back to 1990. The sixth month ADX has only been as high as it is now three times: the start of the tech boom, the crash after the tech boom,and the 2008 financial crisis. So while a sample size of three is hardly anything to put weight on, before we call this current rise ‘too much too fast’, all three of the prior price movements that were this strong did not stall out once their ADX levels reached historic highs like they did. So if you’re looking to pain the current market as bearish, you can’t use its current trajectory as a bullet in your arsenal, not based on history at least.

Confirmation in Equity Participation
For a little while we were just seeing strength coming from the Advance-Declining Line of the large- and mid-cap indices, I shared this chart in my Year In Review to highlight the lack of confirmation from small-caps. However, the recent move in 2018 has helped correct that divergence and we now have all three asset sizes making new highs in their Adv-Dec Lines – a positive sign for the current up trend in equities.

New 52-week High Reaches a New Recent High
Rachel Shasha (h/t Callum Thomas) recently pointed out on Twitter the number of stocks on the S&P 500 that have hit a new 52-week high is at the highest level since 2014. This can be viewed one of two days… 1. Trends often change direction following divergences in this type of breadth data. meaning, as the index is making higher highs less of its component stocks are doing the same which eventually pulls the index itself lower. So this new high would be viewed as bullish since a divergence has not developed. 2. Corrections and small pullbacks can occur when breadth sees a burst higher like this. In fact, that’s what happened in April 2014 when we last saw this many new 52-week highs, the S&P had a slight pullback of about 4% before continuing higher, trend intact. Which would cause you to pause with this burst higher, expecting a pullback like we saw in ’14. It’s up to you which line of reasoning you take with this data.

Sector Performance
While we are just two weeks into the new year, below is a chart of the performance for the S&P sectors, all but consumer staples and utilities are currently outperforming the S&P 500 after the first 10 days of trading.

Sector Relative Rotation Graph
As we could see in the chart above, energy, consumer disc., and industrials are the strongest sectors YTD. They also are the only three sectors to in the ‘leading’ category of the RRG chart. While staples are the second worst performer for 2018 (again, its only been 10 days), they are making a nice move through the ‘improving’ quadrant and may be a sector that sees better performance soon. Meanwhile, the other two defensive sectors, utilities and health care, remain in the ‘lagging’ category; which is something equity bulls may like to see – viewing it as a sign that traders are showing stronger preference for the higher beta sectors.

Broad Sector Performance
If we broaden the scope of sectors we can see that autos, energy, aerospace and retail are showing good strength to start the year.

Retail
Last year it seemed the focused was squarely on tech in the retail space and the cannibalization of traditional brick and mortar retailers. However, in the first two weeks of trading its been the regional department stores that have been the strongest industry inside the retail space. Convenience stores (while this list just includes 3 stocks) are up 11% YTD after not evening finished 2017 in the black.

Crypto Stock Hysteria
One popular theme for stocks is to enter the blockchain/crypto space, often changing their company name to make it painfully obvious that retail investors should gobble up their shares, sending the price violently higher. Chris Mayer shared this table of blockchain-related stocks and their resulting price action over the last two months. As you can see, the average move higher has been 165% (median 126%)….in just two months! Do note the number of these stocks that started their pump advance under $5/share.

Earning Seasons Expectations
Earnings season will soon be upon us and based on estimates from Fact Set, the bar has been set quite high. The focus on many of the earnings calls will surely be on the recent tax bill and the implications it’ll have on individual businesses. But if all goes to plan then we should see the third year of 10+% earnings growth, a sign Wall St. will surely be pleased with.

Future Cap-Ex Spending
Along with the discussion of the tax bill implications, earnings calls will likely include a great deal of capital expenditure. At least that’s what’s being expected of them. In fact, future cap ex spending expectations are at one of the highest levels in 30 years via this chart from the WSJ.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

We close the books on 2017 with many records either set or broken by financial markets. Whether it’s the hundred (thousands in some cases) returns by cryptocurrencies, strong growth in every major OECD economy, record bullishness based on several surveys, economic growth surpassing economists expectations by a near record amount, every country-specific ETF finishing in the green with an average return of 28%, or the pure lack of volatility in just about any asset class. the S&P 500 put in its best annual return since 2003. Overall, 2017 was a great year for financial markets and many hope that strength progresses into 2018. Many traders and market commentators will be pointing to the strength in ’17 as a cause of concern in ’18, however, as Ryan Detrick, CMT has pointed out, when the Dow has been up over 25% (like it was in 2017), eight of the ten following years were also positive with an average gain of over 12%.

Equity Trend
First and foremost before we get into any other chart I believe it’s important to acknowledge the overall trend is firmly bullish for the U.S. equity market. We continue to see higher highs and higher lows in price with intermediate and long-term moving averages also rising.

Asset Class Return in 2017
Bespoke put together a great table showcasing the returns of the major asset categories and groups in 2017. Below you can see the returns for countries, sectors, commodities, fixed income, and major currencies.

Overall Market Breadth
Looking at the Broad market via the Wilshire 5000 Composite, which is a good representation of the entire equity market, we have a continuation of higher highs. This trend has continued to be confirmed by the breadth measurements of mid and large cap advance-decline lines, with a slight negative divergence seen in small-caps . We saw something similar in October when stocks rallied and small caps adv-dec line took a little longer than everyone else to eventually make a new high. It’s good to see broad market participation in the up trend as we progress into a new year.

Long-Term Trend in Breadth Has Begun to Rollover
There are two ways that you can look at this type of breadth data, one is short-term which is looking for confirmation on each in the overall trend of the equity market. However, there’s another viewpoint that can be taken that I don’t believe very many traders use – and that’s the broad trend of breadth and its relation to equity trend. Most recently, we’ve had several bearish divergences in the five-day total of net new highs on the NYSE as shown by the black lines on the chart below. However, the 1-year trend of the net new highs had been either still rising (early-2017) or flat (mid-2017) as shown by the red arrows, which negated the short-term divergences as price continued higher. However, we’ve now seen a shift in the trend of breadth, as the 1-year Moving Average has begun to make a lower high.

In the last 10 years we’ve seen this happen three times. In 2011 the 1-year MA flat-lined before declining and diverging with price before the S&P 500 corrected. In 2014 the trend of breadth peaked and trended lower for the full year and into 2015 before several equity markets put in double-digit declines. Finally in 2007, like many breadth-related indicators, a bearish divergence in the breadth trend was set as the equity market peaked. So what can be gleaned from these past examples is the lack of efficient timing, 2011 and 2007 lasted just a few months before price rolled over however the down trend persisted for over a year before the 2015 correction. Bringing the focus back to today, the breadth trend is still very early in its directional change and is something to be viewed in conjunction with other pieces of price-related data, but nonetheless not to be ignored.

10-Year Treasury Yield
I recently tweeted that I believed we would see a shift in trend for the 10-year Treasury yield in the coming weeks. While I have several reasons for this believe, I’ll share a few of them here. First, we have yield sitting at resistance that’s defined the long-term down trend for the last 20+ years. What I’m referring to is the 100-month Moving Average, which has been ‘tagged’ five previous times, each occurrence sending yield lower.  Also, note the size of the monthly candles over the last few months – we had a large monthly move off 2.1% in September but they’ve steadily tightened during the advance, with minimal upside progress made in November or December. If you are a fan of Fibonacci ratios (I’ll admit, I personally don’t use them very often) then you’ve probably noticed that the 10-yr is roughly at the 38.2% retracement from the 2014-2016 decline.

Commodities
John Murphy, CMT shared a similar chart in his stockcharts.com note last week – looking at the ratio between the CRB Commodity Index and the S&P 500. Below is a weekly ratio of the two markets, John pointed out the near double bottom in December and June with a bullish divergence in momentum, which points to a favoring of commodities.  Commodities have been under-performing stocks since 2011, and the Relative Strength Index (RSI) has been in a bearish range since 2012, as shown by the dotted green line. What I’ll be watching going forward is for the RSI to continue rising higher and breaking out from its range. That would add weight to the potential of a trend change in relative performance as commodities strength. I’d also like to see the ratio break above its prior November high. I’ve seen a few traders reference a belief that 2018 may be a good year for commodities, pointing to poor weather, supply, and price action.

Growth vs. Value
2017 was a great year for many growth-related stocks, with the lack of volatility in equities as a whole, momentum names did quite well. We can see this represented by the up trend in the ratio between the S&P 500 Pure Growth ETF (RPG) vs. the S&P 500 Pure Value ETF (RPV) up until the November weekly high. However, momentum began to diverge in September with a lower high and a second lower high in November which has been followed by a shift in relative performance that’s favored Value (RPV). We saw a similar divergence in momentum back in 2015 which led to Value leading Growth for much of 2016 before the ratio bottomed and we saw a trend change in ’17. With the weakness in Growth vs. Value, the ratio has broken below its prior Sept. and June lows. Will 2018 see a replay of 2016 in Value taking the lead over Growth? This is one chart I’ll be watching closely in coming weeks.

Strength Begets Strength
Steve Deppe posted this chart on Twitter, showing the markets forward return when the prior fourth quarter for the S&P 500 returned over five percent and was above its 1-year moving average. Steve notes that the market was higher in the first quarter 14 of the 17 occurrences.

A Record Setting Year
Many records were set or broken in 2017, one of which was the monthly strength of the S&P 500 (total return) being positive every month last year, the first time this has occurred in market history as noted by Ryan Detrick, CMT. The Dow also saw a string of advances, up nine months in a row which it hadn’t done since 1959.

A Lack of Drawdown in 2017
With strong monthly performance, we also had a lack of downside price action, specifically in the Dow. Dana Lyons ran the numbers and found that the cumulative annual drawdown was one of the lowest since the early 1900s, “As of December 27, the DJIA had lost a cumulative -27.36% on all of its down days throughout 2017. That shattered the prior record of -31.45% set in 1965 which, by the way, is the only other year that saw less than -38% in total losses.”

Record Low Volatility Across the Curve
We closed out one of the least volatile years in history with the Volatility Index futures curve at its lowest level in the last 10 years, besting even 2007.

The Fed’s Balance Sheet
One chart that will likely get a lot of focus in 2018 is this one from Callum Thomas via Cam Hui, which shows the Federal Reserve’s balance sheet. What’s been called one of the greatest financial experiments in history, the Fed’s multi-year QE program will begin to be unwound this year. While the market showed its resilience and ability to rise without continued pumping by the central bank in 2016 and 2017, we now will begin to witness how the market will act once the flows begun to reverse as the Fed goes from buyer to seller.

Mid-Term Election Year
The Stock Trader’s Almanac discusses the market seasonal pattern surrounding the presidential cycle, specifically the mid-term election year, dubbing it “a bottom pickers paradise” due to 9 of the last 17 bear markets having bottomed in a mid-term election year. In fact, the STA notes the Dow has gained on average nearly 50% from its mid-term low to the following year’s high since 1914. The seasonal pattern for the Dow (and the other major indices look similar) has historically seen a high in April followed by a summer pullback with a rally into the year-end, as shown on the chart below. Looking at the past few mid-term election years, 2014 did not see a significant decline, 2010 had a 13% drop, no major weakness in 2006, and 2002 was a major bottom.

Many bears will point to the centennial pattern, with this year being the 8th year and looking at what happened in 2008. However, what they wont tell you is how the market rose 48% in 1928, or 34% in 1958, in fact the Dow has only been negative in a year ending in eight three times since 1928 (’48, ’78, & ’08) according to the STA.

As we start a new year I wish you all the best and I look forward to sharing, learning, and growing with you all as we tackle a new year and new challenges. Cheers!

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.